tailieunhanh - Lecture International financial management: Chapter 10 - Transaction Exposure

Chapter 10 "Transaction Exposure" lecture International financial management. There are three types of exposures: Transaction exposure, Translation exposure, Operation exposure. Invite you to refer to the lecture content more learning materials and research. | CHAPTER TEN MANAGEMENT OF TRANSACTION EXPOSURE FOREIGN EXCHANGE EXPOSURE There are three types of exposures 1. Transaction exposure 2. Translation exposure 3. Operation exposure OF OCCURRENCE TIME OF THE THREE FOREIGN EXCHANGE EXPOSURES ON THE TIME LINE Time point when the exchange rate changes Translation exposure Changes in reported owners equity in consolidated financial statements caused by a change in exchange rates Operating exposure Change in expected future cash flows for following years arising from an unexpected change in exchange rates Transaction exposure Impact of settling existing obligations which entered into before changes in exchange rates but to be settled after changes in exchange rates Time SHOULD THE FIRM Not everyone agrees that a firm should hedge - Hedging by the firm may not add to shareholder wealth if the shareholders can manage exposure themselves. - Hedging may not reduce the non-diversifiable risk of the firm. Therefore shareholders who hold a diversified portfolio are not helped when management hedges. 1 SHOULD THE FIRM In the presence of market imperfections the firm should hedge. - Information Asymmetry The managers may have better information than the shareholders. - Differential Transactions Costs The firm may be able to hedge at better prices than the shareholders. - Default Costs Hedging may reduce the firms cost of capital if it reduces the probability of default. Taxes can be a large market imperfection. - Corporations that face progressive tax rates may find that they pay less in taxes if they can manage earnings by hedging than if they have boom and bust cycles in their earnings stream. WHAT RISK MANAGEMENT PRODUCTS DO FIRMS USE Most u. s. firms meet their exchange risk management needs with forward swap and options contracts. The greater the degree of international involvement the greater the firm s use of foreign exchange risk management. WHY HEDGE What is to be gained by the firm from hedging - The major motive for firms